There are many factors that affect home insurance rates, and your credit is chief among them, unless you live in Massachusetts, California or Hawaii, as those states ban the use of credit in determining insurance rates.
Your credit will affect how much you pay for your homeowners insurance because insurance companies give better rates and terms to consumers who pay their bills and loans, in full, on time.
Insurance scores, based partially or wholly on your credit information, help insurers assess risk and charge the appropriate rate based upon that level of risk.
It is important to understand that an insurance score is not the same thing as a credit score. While both are based on information found in your credit report, they aren't the same thing. A credit score predicts how likely you are to repay a loan or other credit obligation. When you are applying for a loan for example, the bank will consider your credit history as well as other factors, such as income -which insurers do not consider - in determining the likelihood that you will l repay your debt. When you apply for insurance, the insurance company orders credit information from one or more of the threemajor U.S. credit bureaus. This information is entered into acomputer program that generates an insurance score. Most of these programs, or “models,” look at things like payment history, collections, credit utilization and bankruptcies. Forexample, if you have never been late paying your mortgage ,you will probably have a better score than a person whopays late. If you have “maxed out” credit cards, that will negatively affect your score.
Here is a typical example of factors insurers review, and how those factors are weighted in a credit-based insurance score, according to the National Association of Insurance Commissioners:
- Payment history -- 40 percent: How well you have made payments on your outstanding debt in the past.
- Outstanding debt -- 30 percent: How much debt you currently have.
- Credit history length --15 percent: How long you have had a line of credit.
- Pursuit of new credit -- 10 percent: How much you've recently applied for new credit.
- Credit mix -- 5 percent: The types of credit you have (credit card, mortgage, auto loans, etc.)
Insurance companies use credit-based insurance scores to predict how often you are likely to file claims, and/or how expensive those claims will be. Studies by insurance regulators, universities, independent auditors and insurance companies all have shown that an individual's credit history is a proven, strong indicator of how likely that person is to file a future claim, according to insurance industry groups.
Here are some basic facts about credit-based insurance scores, according to the Insurance Information Institute, an insurance industry organization:
- They allow insurers to charge lower premiums to customers who are better risks.
- These types of scores are totally objective and "blind" - insurance scores never factor in a consumer's income, race, address, marital status, age or nationality.
- They promote competition, which means more choice for consumers.
Credit-based insurance scores are "blind" and objective, in that they don`t consider your race, nationality, income, marital status or location.
One of the benefits of credit scores in the homeowners insurance equation is that they enable insurers to offer many more pricing levels, according to the American Insurance Association. For example, those with good credit-based insurance scores can get lower premiums on their homeowners insurance than they could have, say, 10 years ago before credit scoring came to the forefront.
Of course, if you have a bad insurance credit score, you will pay higher home insurance rates because insurers deem you a high-risk, which means you are more likely to file claims and cost them money.
Personal credit reports are available from several organizations, including Experian, Equifax and TransUnion. Reviewing your credit and cleaning up inaccuracies should be an annual ritual, no different than checking on your personal retirement accounts or checking your fire alarm batteries.
If you are denied a policy because of information contained in your credit report used for your insurance score, you can get a copy of your credit report for free from the credit bureau that provided the information, according to the American Insurance Association. If you discover errors in the report, you should immediately notify the credit bureau, as it is required under law to promptly correct the inaccuracies.
To improve your credit score, you can pay your bills on time, apply for lines of credit only as needed (not frequently) and keep the balances low on your credit card bills.
If you're shopping for a home insurance policy, get an idea of how much you can expect to pay for home insurance by using our average home insurance rates tool that provides rates by ZIP code for 75 coverage levels.